Warren Buffett is one of the best-known and most influential value investors of our time. It's for good reason that people often refer to him as the Oracle of Omaha -- his commonsense, value-oriented advice about how to invest in stocks has made him one of the world's wealthiest individuals. So, could some of his most famous advice on stocks be used by crypto investors as well?
On the surface, this might sound nonsensical, given that everyone knows Buffett is no fan of crypto. In the past, he has called Bitcoin (BTC -2.63%) "rat poison squared" and has famously said he wouldn't buy all the Bitcoin in the world for $25. But there is one piece of classic Buffett advice that seems particularly appropriate for today's crypto investors: "Be fearful when others are greedy, and be greedy when others are fearful."
What did Buffett really mean?
In 2008, during the depths of the Great Recession, Warren Buffett wrote an op-ed article (Buy American. I Am) for The New York Times that contained this famous nugget of advice. At a time when many investors were throwing in the towel on American stocks, Buffett argued for a contrarian approach. He suggested that some of the best American companies were being knocked down to unreasonably low levels. And he gave specific reasons certain companies would survive the Great Recession and prosper later.
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Many people misinterpret Buffett to suggest that he was simply advocating for buying stocks during a down market, to get these stocks on the cheap. But his view was more nuanced than this.
You shouldn't purchase a stock just because it's on sale; you should buy a stock because it offers a good value. As Buffett aficionados are fond of saying, price is what you pay for a stock, value is what you get. And Buffett has famously stated that it is much better to buy a wonderful business for a good price, than a good business for a wonderful price.
So we know exactly what to look for: wonderful businesses, selling at attractive prices, with plenty of intrinsic long-term value.
A crypto thought experiment
So consider this crypto thought experiment. Imagine if you were Buffett writing that same Times article during today's current crypto market. You might use a headline like Buy Crypto. I Am. And you would proceed to lay out the reasons crypto is a great long-term investment before describing the types of cryptos that you would be willing to buy right now.
You would probably start with companies in the crypto and blockchain space, rather than cryptocurrencies themselves. Following Buffett's advice, you would focus on companies with solid balance sheets that have been unfairly knocked down as a result of the crypto contagion.
That might lead you to a company like the crypto exchange Coinbase Global (COIN 5.68%), which has $5 billion in cash on its balance sheet but only a $10 billion market valuation. Some investors have already called Coinbase a potential value stock.
From there, you would probably examine the biggest holdings in Buffett's current stock portfolio, and try to find comparable companies or cryptocurrencies that possess many of the same characteristics. That might lead you to Bitcoin, which I've argued resembles Coca-Cola (KO) more than you might think. Or, since Buffett's Berkshire Hathaway invested a large stake in Activision Blizzard (ATVI), it might lead you to a gaming or metaverse crypto that has the same characteristics.
The big caveat about Buffett and crypto
Of course, this is just a crypto hypothetical. The big caveat is that Buffett dislikes crypto for a reason. Try as hard as you like, you might not be able to find "the next Coca-Cola" in the crypto space. Maybe it's all toxic right now. But most likely, simply by going through this little mental exercise, you might find yourself readjusting your mindset about certain cryptos.
From this perspective, some cryptos admittedly look much more like securities rather than plain-Jane digital currencies. In short, they are businesses as much as they are currencies. If you start to think about Ethereum as a massive conglomerate that has a number of different business units, it might lead you to a decision about whether Ethereum (ETH -1.49%) is undervalued at its current price of $1,265.
So, as Buffett suggested, "Be fearful when others are greedy and be greedy when others are fearful." Just don't be stupid. You shouldn't use this advice as an easy excuse to buy any cheap crypto right now.
But by doing some real Buffett-style value analysis, it might just be possible to find some beaten-down cryptos and crypto-related companies that most investors are too afraid to touch right now. As Warren Buffett also wrote in his op-ed piece, "If you wait for the robins, spring will be over."
